Training Course for Economies in Transition on a New
Generation of International Investment Policies
Sarajevo, 1-4 October 2013
Definition of investment,
admission and establishment
Jeff Sullivan - Allen & Overy LLP
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Agenda
1. Introduction and context
2. Definition of “investment”
3. Definition of “investor”
4. Admission and establishment
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Introduction
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Introduction
– IIAs potentially expose States to international legal
proceedings and significant financial liabilities
– Traditional BITs of the 1990s contained broad definitions and
may be considered more favourable to investors
– Influence of previous arbitral decisions – some interpretations
not expected by States at time IIAs signed
– Individual treaty text is paramount
– Capacity-building is essential
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“Investor” and “Investment”
– Defined terms in IIAs
– Key provisions is setting the scope of the IIA
– Must be a covered “Investor” with a covered “Investment”
– Consider the purpose of the IIA
– Host State development
– Attract of foreign investment
– Should ALL investments be covered?
– Several ways to narrow the scope of coverage by choosing
specific language
– There is no perfect definition – it will depend on the State’s
policies and preferences
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Definition of “Investment”
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Definition of “investment”
– Economic definition: Investment is the expenditure of capital
in the expectation of future economic benefit
– No standard definition, but majority of treaties contain a broad
“asset-based” definition of investments such as:
“The term “investment” means every kind of asset invested by investors of
one Party in accordance with the laws and regulations of the other Party in
the territory of the latter, and particularly, though not exclusively, includes:”
- movable and immovable property and any other property rights;
- shares in companies and debt instruments;
- claims to money or to any performance under contract having a financial
value
- intellectual property rights; and
- rights conferred by law or contract”
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Potential problems with “asset-based” definition
– Extremely broad - the list is not exhaustive
– May encroach on right to regulate (e.g., intellectual property rights)
– May cover ordinary commercial transactions
– Contract for the the sale of goods
– May cover portfolio or passive investments
– Limited or no contribution to host State development
– May cover direct and indirect investments
– Treaty shopping
– May cover short-term investments or investments with no risk
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Policy options
1. Use broad asset-based definition
2. Specifically exclude certain types of assets:
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–
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Portfolio investment
Commercial contracts (ordinary sales and services contracts)
Government bonds
Non-business assets
Intellectual property rights not recognised by local law
3. Require investment to have certain characteristics:
– Commitment of capital, assumption of risk, expectation of gain/profit
– Investments must be made for purposes of long term economic
relations
– Investments must be made in accordance with host State laws
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Policy options (continued)
4. Place limitations on temporal scope of treaty
– Protection of investments made only after the treaty’s entry into force
– Protection of investments made both prior to and after the entry into
force, but with a limitation:
“This Agreement applies to investments made before or after its entry
into force, but not to claims or disputes arising out of events which
occurred prior to that date.”
5. Place limitations on policy areas or industry sectors
– For example, treaty does not apply to taxation, grants or subsidies,
public procurement, etc.
– For example, treaty does not apply to fisheries, nuclear energy,
cultural industries, etc.
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“Closed-list” definition
– Some BITs adopt a closed-list definition:
“Investment means the following assets invested in the territory of
a Contracting Party in accordance with its laws and regulations:
[list of assets covered]
“but investment does not mean…”
[list of assets excluded]
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Special characteristics
– US Model BIT (2012)
– ““investment” means every asset that an investor owns or controls, directly or indirectly,
that has the characteristics of an investment, including such characteristics as the
commitment of capital or other resources, the expectation of gain or profit, or the
assumption of risk. Forms that an investment may take include:
– (a) an enterprise;
– (b) shares, stock, and other forms of equity participation in an enterprise;
– (c) bonds, debentures, other debt instruments, and loans;
– (d) futures, options, and other derivatives;
– (e) turnkey, construction, management, production, concession, revenue-sharing, and
other similar contracts;
– (f) intellectual property rights;
– (g) licenses, authorizations, permits, and similar rights conferred pursuant to domestic
law; and
– (h) other tangible or intangible, movable or immovable property, and related property
rights, such as leases, mortgages, liens, and pledges.”
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“In accordance with local law” requirement
– Illegal investment are deprived of treaty protection.
– Examples:
– Fraport v. The Philippines (2007) – circumvention of local law
requirements
– Plama v. Bulgaria (2008) – fraud
– World Duty Free v. Kenya – corruption
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Definition of “Investor”
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Definition of “investor”
– Definition of “investor” is closely tied to concepts of nationality
and is crucial in determining the scope of treaty protection
– Investor is typically defined to include:
– Natural persons
– Legal entities
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Natural persons
– Typical definition: “physical persons who, according to the
law of that Contracting Party, are considered to be its
nationals”
– What law governs nationality?
– Host State law governs nationality
– But customary international law may ignore national law and require
“genuine link” or look to “dominant and effective” nationality
– Most IIAs do not require genuine link
– Although some require nationality AND permanent residence
– Dual nationals?
– Some treaties now require dominant and effective nationality
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Legal entities
– Types of entities covered by the definition may vary
– Those with legal personality only
– Non-profit entities
– Government owned entities (SWFs)
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Legal entities (continued)
– Nationality of the legal entity
– Majority of IIAs refer to place of incorporation:
“any entity constituted or organized under the law of the Contracting
Party”
– Advantage: ease of application
– Disadvantage: “mail-box company”, treaty shopping
– Other BITs require a more substantive link
– Seat or headquarters
– Ownership or control by natural persons who are nationals
– Real economic activities
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Treaty shopping
– Investment by an investor from a non-Contracting Party
through an intermediate company established in the
Contracting Party
– Investment by an investor from the host State through an
intermediate company established in the Contracting Party
– Possible solutions:
– Requirement of “seat” and/or “real economic activities”
– Denial-of-benefits clauses
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Policy options
1. Include all natural persons and all legal entities
2. Exclude certain categories of natural persons or legal
entities:
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Natural persons with dual nationality
Natural persons permanently residing in the host State
Legal entities that do not have their seat or other economic
activities in the home State
3. Include a denial of benefits clause
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Denial-of-benefits clauses
– “A Party may deny the benefits of this Treaty to an investor of
the other Party that is an enterprise of such other Party and
to investments of that investor if the enterprise has no
substantial business activities in the territory of the other
Party and persons of a non-Party, or of the denying Party,
own or control the enterprise.”
– Two elements of the test:
– substantial business activities
– where does the company’s owner/controller come from?
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Admission and Establishment
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Admission and Establishment
– Admission and establishment = market access
– General international law – entry of aliens is in the discretion
of States
– Entry regulations for FDI are common:
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Closing certain sectors for foreigners completely
Restrictions for foreign ownership in certain industries
Restricted admission to privatization
Screening/authorization of foreign investments
– When do treaty protections begin to apply?
– Post-establishment
– Pre-establishment
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Post-establishment
– Most European BITs
– Typical formulation: “Each Contracting Party shall admit
investments by investors of the other Contracting Party in
accordance with its laws and regulations.”
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Pre-establishment – treaty example
Canada-Peru FTA of 2009:
– Article 803: National Treatment
– Each Party shall accord to investors of the other Party
treatment no less favourable than that it accords, in like
circumstances, to its own investors with respect to the
establishment, acquisition, expansion, management,
conduct, operation and sale or other disposition of
investments in its territory
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Policy options
1. Post-establishment
– Limited to compliance with domestic law
2. Pre-establishment
– Consider excluding certain sectors or sub-sectors
– Consider excluding existing non-conforming measures
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Questions?
These are presentation slides only. The information within these slides does not
constitute definitive advice and should not be used as the basis for giving definitive
advice without checking the primary sources.
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Definition of investment.PPT
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